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Is A Flat Yield Curve A Harbinger Of Bad News?

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Shock Exchange


  • The spread between 2-year and 10-year Treasuries is razor thin.
  • The yield curve has inverted just prior to the previous three recessions.
  • Tens of millions of people outside the labor force and falling RV shipments also suggest the economy is headed for recession.
  • There could be pain ahead for the economy, and stocks with high debt loads and cyclical business operations.
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On the surface the U.S. economy appears to be strong. The unemployment remains well below 5% (considered full employment). Average hourly wage growth for the month of October was over 3%, implying workers could switch jobs or demand higher wages from employers for staying put. However, the yield curve could be painting a much different picture. The spread between the 3-year and 5-year Treasury yields inverted earlier this week for the first time in over a decade:

For yield-curve watchers, the spread between 3- and 5-year Treasury yields inverted Monday, dropping to negative 0.6 basis points - its first time since 2007. To be sure, the 3/5 spread isn't the most widely watched measure. That's more likely to be the 2/10.

“The outright inversion could be reflective of the market pricing in some cuts starting in 2020, which may be helping the 5-year tenor outperform slightly,” said TD Securities rates strategist Gennadiy Goldberg.

Some suggested the inversion didn't necessarily foreshadow anything. After all, it is a minor part of the yield curve. The most watched is the spread between the 2-year and 10-year Treasuries. The 2-year yield is 2.83% and the 10-year is at 2.99% - a 15 basis point spread. It's also very flat, and dangerously close to becoming inverted.

Bond King Jeffrey Gundlach, CEO of Doubleline Capital, suggested the bond market signaled a weak economy:

Jeffrey Gundlach, chief executive officer of DoubleLine Capital, said the U.S. Treasury yield curve inversion on short-end maturities was signaling the "economy is poised to weaken."

Gundlach told Reuters the Treasury yield curve from two- to five-year maturities is suggesting "total bond market disbelief in the Federal Reserve's prior plans to raise rates through 2019."

The Fed is hiking short-term rates to beat back inflation as signaled by rising wage growth

This article was written by

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Analyst’s Disclosure: I am/we are short THO, LCII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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